ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with an advisor in New York focused on governmental status. The advisor asked: “I’m working with a special district within my local county that is inquiring about a retirement plan. I believe they qualify as a governmental entity, but is there any way to be sure? I want to make sure I suggest appropriate plans for them.
Highlights of the Discussion
Reviewing the definitions of “governmental entities” would be a place to start. But if you want documentation, the special district may want to file for a ruling from the IRS. According to governing.com there are over 90,000 governmental entities in the U.S.
Section 3(32) of the Employee Retirement Income Security Act of 1974 (ERISA) defines the term “governmental plan,” in pertinent part, as “a plan established or maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing.” We can find a similar definition in the Internal Revenue Code at Section 414(d). The federal government and states are pretty clear. But a political subdivision of a state or agency or instrumentality thereof remains murky.
Generally, a political subdivision is a separate legal entity of a State which usually has specific governmental functions (e.g., the ability to tax). The term ordinarily includes a county, city, town, village, or school district, and, in many States, a sanitation, utility, reclamation, drainage, flood control, or similar district.[1] If the special district is not addressed in state statute it could ask the state administrator and/or attorney general to weigh in on the matter.
In addition to the federal government and the 50 state governments, the Census Bureau recognizes five basic types of local governments: Municipality, township, special district and school district. Of these five types, three are categorized as general-purpose governments: County, municipality and township.
However, legislative provisions for school districts and special district governments are diverse. These two types are categorized as Special Purpose governments. Numerous single-function and multiple-function districts, authorities, commissions, boards and other entities exist in the U.S. The basic pattern of these entities varies widely from state to state. Moreover, various classes of local governments within a particular state also differ in their characteristics. Refer to the Individual State Descriptions report for an overview of all government entities authorized by state.
Finally, the special district could seek a determination from the IRS as to whether it qualifies as a governmental entity by following the process in Revenue Procedure 2018-1. The filing has a $2,400 fee.
Conclusion
There are a surprising number of special purpose units within a state that qualify as governmental entities. State laws may provide guidance, but a decision from a state attorney general or a determination letter from the IRS would be the most conservative route to go.
Any information provided is for informational purposes only. It cannot be used for the purpose of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.
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